The Inevitable Decline of Russia's Energy Sector

Russia has the largest land area of any nation. Its land is not only vast, but rich. Oil, gas, base minerals, diamonds, precious metals, high quality timber, vast freshwater resources -- Russia has it all.

But due to corruption and bad management, most of Russia's production infrastructure still dates to the Soviet era, old and decrepit. The same is true for most of Russia's vaunted military infrastructure. And worst of all, the core population of ethnic Russians is shrinking -- being replaced by Central Asian immigrants with divided loyalties.

And so Russia's oil production is doomed to go the way of Mexico's, if Russia refuses to spend the necessary amount to upgrade its production infrastructure.

While a decade of rising oil output and prices fueled the resurgence of the Russian economy and the Kremlin, a tougher future beckons. The International Energy Agency forecasts a slight decline in Russian oil output for the next two decades. _WSJ

The corrupt Putin oligarchy is indistinguishable from a third world dictatorship in the way that it is stripping the country's natural resources for the enrichment of top officials and their close crony connections.

Russia's western Siberian fields—60% of the country's current output—are a declining Soviet legacy. Offsetting this with new fields in areas like the Arctic offshore will be challenging and, hence, expensive.

Lower exports and rising costs point to smaller margins for oil companies—and a smaller take for a state whose dependence on energy revenue has increased. Unless Russia can crack modernization and diversification for its economy, this represents a crisis in the making. _WSJ

If oil production and oil income decline, there will be less booty to pass around the table of kleptocrats. That would likely shift the attention of the oligarchs to the scavenging of other parts of Russia's infrastructure -- the military in particular.

The comparison of Russia with Mexico is not as far fetched as one might think. The same loss of control of vast parts of the landscape to criminal organisations that one sees in Mexico, is taking place across large areas of Siberia -- extending even West of the Urals. Of course in Siberia, Chinese interests are also beginning to insinuate themselves in a large way. Moscow -- like Mexico City -- is losing its ability to control outlying areas.

One of the worst things that could happen is that the Russian government could intentionally or unintentionally lose control of its nuclear arsenal. Should that happen, Russia and the rest of the world would have much more to worry about than the price of oil.